I believe that HECM, Home Equity Conversion Mortgage, can be a great solution for helping seniors gain financial independence. If you are a Southern California resident who is interested in a reverse mortgage, please feel free to contact me if you would like more information.

HECM… Home Equity Conversion Mortgage (Reverse Mortgage)

A Reverse Mortgage to PURCHASE a property? How does it work?

A reverse mortgage purchase allows seniors age 62 or older to buy a new home with HECM loan proceeds. The primary benefit to the senior is that the transaction only involves one set of closing costs versus buying a home and obtaining a reverse mortgage thereafter, which would incur two complete sets of closing costs. Created by the Housing and Economic Recovery Act of 2008, this program became live on January 1, 2009. Qualified seniors must conform to all HECM requirements, all of the basic rules apply in addition to some new rules and regulations.

What Are The Basics?

Can purchase existing 1 to 4 unit property

Property must serve as principal residence

Once HECM purchase is complete, no additional liens are permitted (Lender in 1st position, HUD in silent 2nd)

Must provide monetary investment at closing from allowable funding source, see below for details

Must occupy property within 60 days of closing

Newly constructed properties must have a certificate of occupancy issued by the time the Home Equity Conversion Mortgage purchase loan is insured by FHA ('endorsed').

There Are Some Differences Between A HECM For Purchase And A Traditional HECM For Seniors.

The major differences concern the property types that are eligible, the cash required at closing, the involvement of a Realtor in the loan process, the recommendation of a professional home inspection, and certain closing costs.

There are guidelines regarding which properties are eligible for a Reverse Mortgage.

Eligible Properties

Same as federally-insured reverse mortgages or Home Equity Conversion Mortgage loans.

Ineligible Properties

Cooperative units

Manufactured housing built before 1976 and lacking permanent foundation

Bed and breakfast properties, boarding houses

What Is The Monetary Investment Requirement?

At closing, HECM borrowers must provide a monetary investment which will be applied to satisfy the difference between the HECM principal limit and the sales price for the property, plus any HECM loan related fees that are not financed or offset by other allowable FHA funding sources. In other words, the proceeds from the reverse mortgage and any funds from the sale of the old property (or from the borrower’s savings) must be enough to purchase the new property outright.

The difference between principal limit and sales price for the property also includes any HECM loan related fees that are not financed or offset by other allowable funding sources. Borrowers may provide larger investment amounts in order to retain a portion of HECM proceeds for future draws.

What Are Allowable Funding Sources?

Their own money or money obtained from sale of assets.

Withdrawals from borrower’s savings or retirement account are acceptable.

Lenders will be required to verify the source of all funds prior to closing. A verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. If there is a large increase in an account, or the account was opened recently, the lender must obtain a credible explanation of the source of those funds. Such documentation must be provided in the FHA case binder. Failure to provide the necessary documentation may result in a notice of rejection and delay of endorsement.

What Funding Sources Are Ineligible?

Loan discount points

Interest rate buy downs

Closing cost assistance

Builder incentives

Seller contributions or seller financing

Credit card advances

Secured or non-secured loans from another asset (car, home equity)

Borrowers may not obtain a bridge loan (also known as gap financing) or engage in other interim financing methods to meet the monetary investment requirement or payment of closing costs needed to complete the purchase transaction. This restriction includes subordinate liens, personal loans, cash withdrawals from credit cards, seller financing and any other lending commitment that cannot be satisfied at closing.

What Is The Role Of Real Estate Agent?

Senior should consider a written agreement – you should include contingencies for the sale of the senior’s previous home, the home inspection, etc.

Selecting A Home For Purchase & Getting An Inspection

All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector (This is suggested but not required)

Identifies items that need to be repaired or replaced prior to the scheduled closing date

Estimates the remaining useful life of the major systems, equipment, structure, and finishes

Buyers should be at the inspection to ask questions about the condition and maintenance

All seniors are strongly encouraged by HUD to get a home inspection from a licensed professional home inspector.

Required Repairs

Health and safety or structural integrity issues

Must be completed prior to closing by seller

Include in purchase agreement

Buyer cannot put any money into repairs before they own the home

Writing An Offer

Must state offer contingent on satisfactory inspection conducted by qualified inspector

Borrower may want attorney to review – increases costs but may be worth it

Client may cancel transaction at any time prior to closing but this could affect earnest money deposit

Closing Costs

Standard HECM closing costs plus:

Recordation fees

Transfer taxes

Varies from state-to-state

Other Things You Should Know:

There is no three day right of rescission unlike traditional HECM. The three-day right of rescission period is not applicable to HECM for Purchase transactions. Therefore, all initial advances may be disbursed on the day of closing by the settlement agent. However, FHA encourages lenders to seek their counsel’s opinion to assure compliance with Federal or State laws.

Seller concessions are not applicable to reverse mortgages.

Existing HECM borrowers who participate in a HECM for Purchase transaction are ineligible for a reduction of the upfront MIP and lenders must enter the transaction into FHA Connection as a new HECM.

HUD-approved housing counseling agencies that have been approved to provide reverse mortgage counseling, must counsel those who anticipate using the HECM for Purchase option on all topics covered in this Mortgagee Letter and other HUD requirements and issuances.

Lenders are required to ensure the property, when used as collateral for the HECM, meets the following property requirements:

1) It is the borrower’s principal residence;

2) Construction is complete and a certificate of occupancy or its equivalent has been issued by the time the loan is insured by FHA ('endorsement') or by the lender's deadline, and

3) Any construction loan financing for the property, which will serve as the collateral for the HECM loan, is satisfied and the HECM liens will be in a first and second lien position and, at the time of closing, no other liens against the property exist.

Property Flipping

To avoid cases of property flipping, lenders must take steps to ensure that:

Only current owners of record may sell properties that will be financed using FHA-insured mortgages;

Any resale of a property may not occur 90 or fewer days from the last sale to be eligible for FHA financing; and

For resales that occur between 91 and 180 days where the new sales price exceeds 100% of the previous sales price, FHA will require additional documentation validating the property’s value.

Property Flipping Scams

If a lender suspects a senior has become a victim to a property flipping scam, the Processing and Underwriting Division of the local HOC should be contacted.

This information is not intended to be a substitute for legal, tax or financial advice. Consult with a qualified attorney, accountant or financial advisor for additional legal or tax advice. These materials are not from HUD or FHA and were not approved by HUD or a government agency.* There are some circumstances that will cause the loan to mature and the balance to become due and payable. The borrower(s) must continue to pay for property taxes and insurance and maintain the property to meet HUD standards or risk default.. Credit is subject to age, minimum income guidelines, credit history, and property qualifications. Program rates, fees, terms and conditions are not available in all states and subject to change.

237341. Refer to http://www.nmlsconsumer.org/EntityDetails.aspx/COMPANY/237341to see where AFN is a licensed lender. In all states, the principal licensed office of American Financial Network, Inc. is 10 Pointe Dr. #330, Brea, CA 92821; Phone: 888/636-7573. The content in this flyer is for informational purposes only. The content is not meant for legal, tax or professional accounting advice. Please consult your state benefits advisor if you receive public benefits, as these may be affected, or consult a tax professional. All American Financial